Don’t Panic

On Sunday, Italy’s citizens vote on whether or not they agree to the rational and overdue constitutional reform of their government. The referendum also is said to be a preliminary decision on the whereabouts of Italy in the European Monetary Union (EMU). But even in the case of a "no" to the reforms, an exit of Italy – a so called Ixit - of the Euro area is by no means settled.

Although many observers see it differently, the results of Matteo Renzi’s government so far are rather good, the glass is not half-empty, but rather half-full. Renzi has launched numerous reforms, some of them have already been fully implemented. The labour market reform, called "Jobs Act", in particular is held in high esteem by international institutions. Further reforms are planned, and the political system is supposed to be restructured, including an overdue rearrangement of the power away from the Senate and the provinces. All this will make Italian governments more effective, it is meaningful and forward-looking.

The one aspect of which Renzi’s government might be accused of: It waited too long with cleaning up the banking system. But even here, a differentiated judgment is necessary. Italian banks, unlike their German competitors, for example, have hardly invested in toxic US real estate securities before 2008’s global financial crisis. And unlike their competitors in Spain, Ireland and Greece, Italian banks have not fuelled a real estate bubble. They merely financed Italian companies and have held on to these loans after the Italian economy slid into a long-term crisis.

Nevertheless, the Italian population may penalise Renzi and his team at referendum day on Sunday. But even then, not all hope is lost: there will be no vacuum of power, but probably a technocratic transitional government, which might actually complete some of the still pending reforms, such as the reform of the insolvency law or the judicial system. And even in the upcoming elections, it is by no means certain that the Euro sceptics come to power. In case of a No in the referendum, the likely turmoil in financial markets will reveal to the Italian electorate the risks, which might result from voting for a euro exit. The memory of Greece’s choices may help in this respect: Last year, the country has teetered on the brink of the abyss, but has desisted a Grexit in the last minute.